Earlier, Fed Chair Jerome Powell indicated the central bank would hike rates by half a percentage point this month. But worrying inflation data released last Friday, which showed prices rose 8.6% in the 12 months to May, underscored the need for more aggressive action.
“I don’t expect moves of this magnitude to be common,” Powell told reporters. Still, it left the door open for another rise of the same magnitude next month if the data don’t improve.
The Fed isn’t the only one trying to prove it’s on the ball.
The European Central Bank held an emergency meeting on Wednesday after announcing last week that it intends to raise interest rates for the first time since 2011 saw bond markets in Italy and Greece tumble.
After the meeting, the ECB said it would accelerate work on new ways to ease the pressure on heavily indebted European countries as interest rates rise.
Investor insight: The central bankers managed to calm the markets on Wednesday. The S&P 500 closed 1.5% higher, breaking a five-day losing streak. Yields on benchmark Italian and Greek bonds, which move counter to prices, fell as selling pressure eased.
“The market seems happy right now,” said Jeffrey Frankel, co-president of Stuart Frankel & Co., a stockbroker.
But investors are rethinking on Thursday. Trying to correct past mistakes is hard work. It can also limit future policy options.
If the ECB had made it clear at its meeting last week that it would not tolerate “fragmentation” in the European bond market – citing the rapid rise in Italian and Greek bond yields – it would not have had to correct course accordingly Holger Schmieding, Chief Economist at Berenberg Bank.
The ECB clearly has the ability to step in when needed. But the communication failure could have lasting consequences, he argued.
“The ECB [on Wednesday] We managed to reverse part of the sell-off,” he said in a note to clients. “But after the turmoil of the last few days, markets are now more nervous than before.”
Strategists also fear that the Fed’s sharp rate hike could increase the likelihood of a US recession by quickly slamming on the brakes on growth.
“Inflation is strong and hasn’t peaked yet, putting Powell in a corner,” said Kenny Polcari, managing partner at Kace Capital Advisors. “They should have been more aggressive earlier in the process.”
When will the Bitcoin sell-off bottom?
Bitcoin has plummeted this week as the sell-off in digital assets shows few signs of abating, fueling debate among die-hard pundits about how far prices could fall before they begin to stabilize.
The world’s most valuable cryptocurrency hit nearly $20,000 on Wednesday. It has lost around 70% of its value since hitting an all-time high in November last year when it was trading around $69,000.
Breaking below $20,000 would be a sobering milestone for a market that has been booming during the pandemic, analysts say.
“A drop below $20,000 would be a massive psychological hit and could send Bitcoin further into a tailspin,” said Craig Erlam, a senior market analyst at Oanda, a forex firm.
Ether, the second most valuable digital coin, has lost almost 80% of its value since its peak in November.
As central banks raise interest rates to bring inflation under control, traders have dumped riskier investments, including volatile crypto assets.
Investors with a long-term perspective, however, shrug their shoulders at the extreme price declines.
“Crypto bear markets typically pull down between 85% and 90%,” said Jason Yanowitz, co-founder of Blockworks, a research platform for crypto investors.
During the downturn in 2017 and 2018, Bitcoin plummeted 83% from $19,423 to $3,217. It recouped all those losses at the end of 2020 and rose sharply in 2021.
“I really disagree with people who say there’s no way to recover from something like this,” Yanowitz said.
Consumer spending falls when inflation bites
The high cost of gas and groceries are prompting US consumers to rein in spending on other items, another sign that the US economy – while still looking solid – may be beginning to lose steam.
Retail sales fell 0.3% in May compared to April, marking the first decline in spending this year, according to data released on Wednesday.
Spending at gas stations rose 4% in May from April. It’s up 43% year-on-year due to rising prices at the pump. Spending at grocery stores, where prices are also rising, rose 1.2% from April.
Spending at other retailers fell 1% from the previous month.
The numbers were softer than expected. But they could have been worse given how quickly consumer sentiment has deteriorated. Stress over high gas prices and concerns about the turmoil in stock markets have pushed consumer confidence to record lows.
“You’re seeing continued shifts in consumption, you’re seeing some sales declining, but overall spending is really strong,” Powell said Wednesday. “Financially, the consumer is in really good shape.”
Remember, households still have savings from the pandemic to draw on to cushion the blow of high inflation. Compared to May 2021, retail sales increased by 8.1%.
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